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Corporate, finance & investment landscape shifting to sustainability

Australia's sustainable finance roadmap will look to international best practice, citing the European Commission's recommendations.

Some of Australia’s biggest banks have joined forces with insurance and superannuation organisations to launch an Australian Sustainable Finance Initiative that aims to shake up the corporate/finance/investment landscape and Australia’s economy. 

Joining Westpac, Bank Australia, Commonwealth Bank and NAB,  are CBUS, IAG, Business Council for Sustainable Development Australia, and John Hewson, among other leaders in the sector.

A committee, overseen by representatives from academia, green think tanks and the UN, will chart a roadmap to be delivered next year. Its aim is to guide corporate Australia and the economy through the following decade, in the light of issues such as climate change, human wellbeing, social equity and environmental protection, to ensure the stability of the financial system.

The chief aims of the Sustainable Finance Initiative

The initiative is tasked with developing a set of recommendations to enable the finance sector to better contribute to the country’s transition to a more resilient and sustainable economy.

Geoff Summerhayes, executive board member of Australian Prudential Regulation Authority and also executive committee member of the International Association of Insurance Supervisors and chair of the Sustainable Insurance Forum, will be a formal observer of the committee as will Eric Usher, head of the UN Environment Program Finance Initiative, Economy Division.

Simon O’Connor, co-chair of the initiative and chief executive officer  of the Responsible Investment Association Australasia, said that the motivation for the initiative was because “issues such as climate change and human rights have become material to business and the financial services community.

“Climate change was recently described by the deputy governor of the Reserve Bank of Australia as a ‘systemic risk’ to the stability of our economy, and APRA emphasised last week that climate risks are ‘material, foreseeable and actionable now’.

“The financial services sector is both exposed to those risks, as well as having an essential role in funding and underwriting a future Australia, providing the capital necessary to deliver on sustainable development and climate-related commitments.”

Part of the role of the roadmap will be to better align the financial services sector with the sustainability goals, in order to both “deliver for Australians while building a better, more stable and sustainable financial system”.

Jacki Johnson, the Insurance Australia Group’s group executive for people, performance and reputation, described it like this: “a sustainable and resilient economy is a necessity, not an option, and is the foundation for ensuring Australia’s prosperity throughout the 21st century”.

She added: “Australia has made a number of commitments to international targets. Achieving these goals extends beyond social or environmental objectives – it’s an economic and financial necessity. Our economy simply cannot prosper in an environment of ever-increasing severe weather events and the subsequent broader impacts these will have. Achieving these goals presents a sizeable economic and social opportunity.”

The global need for sustainable finance

According to the OECD the world needs $6.9 trillion of annual investment in energy, transport, buildings and water infrastructure over the next 15 years to be consistent with keeping average global temperature is below 2°C.

Even higher investment levels will be necessary to cap global warming at 1.5° Celsius as recommended by the UN Intergovernmental Panel on Climate Change and to achieve a net-zero greenhouse gas economy that, for example, the EU is targeting in its long-term strategy for 2050.

Public funds will obviously not be sufficient to meet these investment needs and the financial sector has a critical role to play.

What we might expect from the sustainable finance roadmap

The announcement of the Australian launch explains that the roadmap is to be modelled on international best practice.

It will draw upon the European Union’s High-Level Expert Group on Sustainable Finance, which was set up in December 2016, and whose final report was published a year later, and the UK’s Green Finance Taskforce, whose report was published a year ago.

The UK report, Accelerating Green Finance, contained these recommendations:

  • Boosting investment into innovative clean technologies
  • Driving demand and supply for green lending products
  • Setting up Clean Growth Regeneration Zones
  • Improving climate risk management with advanced data
  • Building a green and resilient infrastructure pipeline
  • Issuance of a sovereign green bond – debt security issued by a national government.

None of these are to do with cleaning up the financial system: they are to do with raising investment for the clean energy economy. They’re about green finance, not greening finance.

In regard to reform of the total system there are better clues as to what might lie ahead for Australia from looking at the recommendations of the European expert group. These were:

  • A classification system, or taxonomy, to provide market clarity on what is sustainable
  • Clarifying the duties of investors’ when it comes to achieving a more sustainable financial system
  • Improving disclosure by financial institutions and companies on how sustainability is factored into their decision-making
  • A label for green investment funds
  • Making sustainability part of the mandates of the Supervisory Authorities
  • A standard for green bonds.

It was up to the European Commission to finalise its strategy on sustainable finance on the basis of those recommendations and a year ago, it published its Action Plan on Financing Sustainable Growth, soon after releasing the three legislative proposals that have shaped the progression of work since then, covering: the disclosure of sustainability risks, a pan-European taxonomy to classify environmentally friendly activities, and low-carbon benchmarks.

Europe is following up well on the recommendations

According to Catherine Howarth, the chief executive at ShareAction, a non-profit organisation working to make the investment system a force for good, the EC is following up well on the recommendations.

She says, “the EC is in the final stages of negotiations on the Disclosure Regulation could secure reporting on sustainability risks for mainstream products, not just those in the green niche.”

This regulation “could encourage investors to assess the impact of their activities on communities and the environment, in addition to assessing the financial materiality of sustainability risks”.

But she says other proposals made by the expert group are lagging behind. Work on investors’ duties, which covers a whole set of recommendations as to how sustainability risks should be integrated in investment decisions, is slow.

And, she adds, “provisions for consulting with beneficiaries of occupational pension funds on their views have lost steam”. The benefit of this “is potentially slipping from grasp”.

“Reform of investors’ duties would present an opportunity to build a more democratic and accountable financial system,” she says.

The significant fault line in moving to sustainable finance

Howard has identified a significant fault line in acting on the recommendations. It’s relatively easy to influence the “sustainable” segment of the market, like green bonds, by introducing cross-cutting anti-greenwashing tools – as the UK has confined itself to doing – but “achieving a systemic shift of capital from brown assets to green is much harder,” she concludes.

To integrate sustainability risks in investment decision-making in order to mitigate financially material risks within a “business as usual” time horizon is difficult enough, but to actually design out negative investment-driven externalities that affect the lives of millions of people whose savings drive capital markets is the ultimate challenge.

It still remains to be seen whether this can be met.

The second high-level conference on sustainable finance

On 21 March the European Commission organised its second high-level conference on sustainable finance.

“We would need at least four planets to keep up our current lifestyle, the way in which we produce and consume,” the president of the Commission Jean-Claude Juncker told the conference. “But we only have one. The green transition will not happen without the financial sector. It is about making sure that our money works for our planet. There is no greater return on investment.”

“It’s about creating a capital markets union that takes into account the urgency of climate action at the European level,” added Michael Bloomberg, now the UN Secretary General’s special envoy for climate action. “We must align these two objectives. Capital markets as we know are one of the most powerful tools that we have in a fight against climate change and one of the most overlooked.”

And the vice president of the European Commission, Valdis Dombrovskis, told the conference, “The financial sector needs to throw its full weight behind the fight against climate change.”

Europe clearly has support for sustainable finance from the very top. Australia is now searching for similar leadership.

David Thorpe is the author of the book The “One Planet” Life and the forthcoming book “One Planet’”Cities.

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